Many Islamic fund managers charge fees well in excess of the going market rate. There are a few commonly mentioned reasons for this, the main one being the unique character of their service offering swiftly followed by the size of assets under management, and the zakat obligation. Looking at each of these in turn, however, provides some interesting food for thought.  Is the offering significantly different from conventional funds? Generally, we see that the types of funds available are similar to the conventional fund ranges, bar perhaps a convincing hedge fund offering.

 Although the available investment universe may be smaller, there is some evidence from index providers that this may not be as significant as often thought. The volume of assets under management is indeed comparatively smaller with many funds managing only a small amount of money. In part, this is associated with the relative maturity of the market.

Arguably, the lack of assets under management may also be adversely impacted by the disproportionally higher management fees thus creating a vicious circle. The zakat obligation is an interesting point, but should it really result in higher management fees?

Instead it may be considered as part of performance in which case it can potentially be dealt with in two different ways. Option one is to defer the obligation to pay zakat to the investor, although the practise of reinvesting revenues might make it difficult to administer. The second solution is to let the fund pay, and report performance both inclusive and exclusive of zakat. This would provide clarity and transparency on the actual performance of the fund, and may enhance its attractiveness to a wider range of investors.

Dr Natalie Schoon, CFA